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By all indications, the worst of the recession is over, if by recession one means the declining growth of production. The housing sector's decline has finally bottomed (as shown in sales, prices, and housing starts) after more than two years of extremely low production. Other indicators of activity outside of housing also seem to have bottomed, based on actual production data and leading indicators of production and income. It is likely that the last quarter of 2009 will show positive growth in gross domestic product, and 2010 will see rapid growth. But the end of the worst of the recession is not the end of our economic challenges. The end of the recession will likely usher in one of the weakest economic expansions in U.S. history, and job growth will suffer as a consequence.

Indeed, if recessions are gauged by employment growth, rather than production growth, we may be far from the end of the jobs recession. Employment growth has lagged far behind production growth in the last two recessions, partly because productivity gains (associated with layoffs and other aspects of what economists term "creative destruction" during recessions) allow production to rise for a year or more without significant growth in the labor force. There is every reason to believe that this recession will follow that same pattern.

Productivity growth and job losses are following the same pattern as the past two recessions thus far. Job losses have been severe and net job losses are still in the hundreds of thousand per month (don't let the drop in the unemployment rate last month fool you; that was the result of people dropping out of the labor market altogether, which reduces the denominator in the calculation of the unemployment rate).

More importantly, there are reasons to believe that the engine of growth in jobs during economic expansions -- expanded investment, especially by small businesses -- will be slow to recover this time. Small businesses are still facing a credit crunch due to the lack of available bank credit (bond markets have seen an expanded supply of funds, but only the largest firms have access to those markets). Tax increases, especially the personal tax increases scheduled to begin in 2011, will have dramatic negative effects on small businesses, and most small businesses will see little reason to invest in 2010 given the taxes that will be imposed on those investments in 2011 and beyond. Add the proposed carbon tax, health care tax surcharge, and anti-free trade policies of the Obama Administration (another form of business tax) and it would be hard to find a more inhospitable environment for business investment in the past two decades. What about consumption? Consumption growth will also remain low due to slow jobs growth and slow growth in consumers' wealth (anti-growth policies will keep the stock market from rising as it normally would during a recovery).

Even worse, expanded government expenditures and the prospects of severely expanded deficits due to the so-called "stimulus" bill, rising health care spending (not just new proposed spending initiatives, but already enacted spending related to Medicare), and social security will put the U.S. in the position for the first time in decades of having an unsustainable deficit -- meaning a deficit that requires financing through inflationary money creation. Unless these policies are reversed (an unlikely prospect under the current administration and Congress) the risk of rising inflation will become large. That will cause long-term interest rates to rise and stay high within a couple years, which will further depress investment and consumption.

So, yes, the worst of the production recession is behind us, and it is possible that growth in income and production will be robust in the last quarter of 2009 and all of 2010. But the lack of growth in jobs and the petering out of growth after 2010, resulting from the anti-growth policies and unsustainable deficits of the Obama Administration and Congress, will make this recovery and expansion one of the weakest in US history. And the prospects for stagflation (low growth and rising inflation) are high looking roughly three years or more into the future.

As to the question of whether Ben Bernanke should be reappointed, I will leave that for another day, except to say that the lackluster growth picture and risks of inflation I have just described are not his fault. The core economic problems we face are the result of runaway spending, which is the fault of the previous administration and Congress as well as the current ones, and the extreme anti-growth and high deficit policies of the current Administration and Congress.

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